According to investment manager David Rosenberg, stocks are 20% overpriced against a US economy facing a recession. Despite who wins the presidential election, they will find themselves faced with the so-called fiscal cliff and tough budgetary decisions.

Election Day is an opportune time to check in with David Rosenberg, the plain-speaking chief economist and strategist at Canadian investment manager Gluskin Sheff + Associates. From his perch north of the U.S. in Toronto, Rosenberg looks at the U.S. presidential election from the edge of the so-called fiscal cliff and the tough budgetary decisions that await the election winner.

What Rosenberg sees is a nation where stocks are 20% overpriced against a U.S. economy that faces, if not an outright recession, then a “growth relapse” that would trim GDP expansion to around 1% at best.

“The economy is still in the throes of a multi-year credit contraction phase,” Rosenberg told clients in a research note published Tuesday. “What we can expect is for the pace of activity to weaken substantially during periods when [Federal Reserve] stimulus fades.”

No matter who wins the presidential election, Rosenberg adds, Washington will tighten its belt in 2013 – the only way “to put the nation’s finances on a more stable footing.”

Rosenberg’s outlook clearly isn’t the best backdrop for stocks: “The market is not as cheap as the pundits, who rely on year-ahead EPS estimates, deem it to be,” he wrote. “When one incorporates cyclically adjusted corporate earnings in ‘real’ terms, equities are still roughly 20% overvalued.”

To correct this imbalance, stocks will trade down to a price-earnings multiple of around 12 with a 4% dividend yield on the Standard & Poor’s 500-stock index SPX +0.79% . That said, Rosenberg isn’t herding investors into the lifeboats. He’s bullish on themes that reflect the frugal consumer, including discount retailers, home improvement and food and beverage staples. Rosenberg also taps non-cyclical sectors such as aerospace and health care. He favors income-producing stocks and bonds, and likes gold miners over bullion.

These conditions reflect a secular, sideways market that began in 2000 and historically runs 16 to 18 years, Rosenberg says. In such a market, he adds, investors have to be nimble: “Rallies are to be rented, not owned.”

When can investors expect to see a new bull market? Says Rosenberg: “We likely have a long way to go.”